A teller counts money at a branch of Vietnam International Bank in Hanoi
As credit growth remains sluggish and deposits increase, banks have stepped up purchase of government bonds, but this has failed to serve economic development.
Analysts note that delays in public investment projects have meant that the money raised from the issue of bonds has not been spent but, instead, has been deposited in banks.
“Ample deposits and sluggish credit activity have forced commercial banks to pour their capital into other investment channels. Government bonds have become their choice of investment despite their lower interest rates,” economist Nguyen Tri Hieu said. “Banks prefer bonds since they lend little and gold and other asset classes are risky. The bonds also offer instant liquidity.”
Interest rates offered on bonds issued in February were down by 0.32-0.62 percentage points over January.
The Hanoi Stock Exchange estimates government bonds worth more than VND50 trillion (US$2.38 billion) were sold last month. Transactions of government bonds on the secondary market jumped 15.9 percent in February over January.
Despite interest rate cuts of 0.2-0.5 percentage points, deposits have increased since the beginning of this year, as it is still considered an attractive investment channel, given fluctuating gold and stock markets, and a frozen property market. Banks now offer interest rates of less than 7 percent on deposits of 6 months downwards.
According to the State Bank of Vietnam (SBV), banks’ deposits increased 0.83 percent as of February 20, compared to late last year.
However, credit continues to stagnate because banks are more careful in lending, given bad debt concerns.
Meanwhile, firms do not want to borrow capital, as the low purchasing power in the market gives them little incentive to expand production or trade.
Banks saw a credit reduction of 1.66 percent as of February 20, compared to late last year, according to the central bank.
Le Quang Trung, vice general director of Vietnam International Bank, said banks are having ample capital due to increasing deposits, decreasing credit and repayment of expired bonds. Thus, government bonds are a good option.
With the lower interest rates, the government can enjoy benefits in issuing bonds to get funds for public investment, but experts are concerned this would also cause public debt to rise.
Economist Bui Kien Thanh said, “Though the government has guaranteed that despite the higher budget deficit cap and the issuance of new bonds, Vietnam's public debt would not exceed the ceiling of 65 percent of GDP set by the National Assembly for 2015, there would be increasing repayment pressure.”
The Ministry of Finance estimates public debt at 52.6 percent of the GDP by this year end.
Thanh said increasing public debt would also abet inflation, which was 6.04 percent in 2013.
According to the Ministry of Planning and Investment, the government can issue bonds worth VND360 trillion ($17 billion) in the 2014-16 period without exceeding the public debt ceiling set by parliament.
Having already received approval from the National Assembly to issue bonds worth VND75 trillion ($3.5 billion) in 2011-15, it plans to issue bonds worth the remaining VND285 trillion, the ministry said.
Former SBV governor Cao Sy Kiem said: “Monies raised from bonds have made a great contribution to the country's economic development, but their use had not been carefully monitored, causing big waste, and the mistakes have not been addressed.”
“The government therefore should issue bonds for specific projects based on clear economic parameters.”
SBV governor Nguyen Van Binh said at a government meeting late last month that VND57 trillion collected from government bond issuance has not yet been disbursed to public investment projects. The State Treasury has deposited the money in banks, he said.
The government has asked ministries to accelerate projects, so that the money can be disbursed soon.
However, an economist who asked not to be named said it is not easy to speed up disbursement because there are many reasons for the delays in public investment projects, some of which have not been resolved for many years.
Stagnancy in the disbursement will cause losses to the state budget, he said. The government has to pay interest rates of 6.2-7.5 percent on its bonds but only earns interest of less than 2 percent.
“The longer the disbursement is delayed, the bigger the losses suffered by the state budget,” the economist said.
He said banks can use deposits made by the treasury to buy more government bonds and enjoy higher interest rates.
Kiem said the most important issue is that the funds have not gone into production, failing to boost economic development. Later, the banks’ liquidity could come under threat when the treasury suddenly withdraws its large deposits.
The economist said the government should not issue more bonds until the money raised from previous issuances has been disbursed, adding this would force commercial banks to seek ways to boost credit growth, instead of focusing on buying government bonds as they are doing now.
Vietnam has set a credit growth target of 12-14 percent this year.
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